Do we really need to regulate trolls? The law of unintended consequences

I am going to range a bit from my usual subject matter here. I have been thinking a little about patents and all the joy around “Intellectual Property” (IP). But be forewarned, this legal analysis is worth the same amount as my non-existent JD.

Let me say upfront that I do not like ‘patent trolls’, or companies that buy up patents and use them to sue other people. And having seen an IP lawsuit up close, I can also attest that the way we organize IP in this country needs some very serious repair.

So, you think I would be all in favor of US House of Representatives Bill #9 (HR9), also known as the U.S. Innovation Act. (And right away, that name should be a warning.) HR 9 has been presented to the public and the media as “patent reform”, a bill which penalizes “trolls” from harming “innovators”.

And here is where we start to get in trouble.

First, defining a ‘troll’ or an ‘inventor’ is very hard. For example, what if a company invented all kinds of things ten years ago, but today lives solely on license revenue from those inventions? Where do you draw the line? The closer you look, the murkier it gets.

Second, it is not entirely clear that we need a new law to defend against ‘trolls’. There were a number of legal decisions last year that hurt some of the bigger IP firms meaningfully. Infamous ‘trolls’ like Intellectual Ventures is still alive, but has cut back its ambitions quite a bit. Do we need another law if the courts have already fixed much of the problem?

Third, does HR9 really fix the problem? As with most things, could it come at a cost? A key provision of HR 9 is that in a lawsuit regarding a patent, the loser pays the winner’s legal bill. These bills can be measured in tens of millions of dollars. Maybe that sounds reasonable, but one of the things that has me concerned is that HR9 ‘pierces the corporate veil’. Modern capitalism is based on the idea of limited liability. If you are an investor in a company, you can not be held personally responsible for the actions of that company. If the company loses a lawsuit, you the investor do not have to chip in to pay for the penalty. However, HR9 allows for investors in patent-holding entities to be held liable for losses in a lawsuit.

If you really hate trolls, that may sound reasonable, but there are some ‘unexpected’ consequences of that. What if the person losing the lawsuit is not a troll, but a start-up? As I noted above, defining a troll is very tricky. So maybe a broad reading of HR9 means that any start-up that loses an IP lawsuit with a bigger company can be on the hook for massive legal bills.

One of the saddest things in our legal system today is the fact that an IP lawsuit can cost more money than you would need to raise to start a company. Put another way, the legal bill from a lost IP lawsuit can be more than a company raises from its investors. Add to this, the fact that those venture investors can be on the hook for legal fees above and beyond what they invested, and I think it is safe to say that no start-up is ever going to sue a bigger company if HR9 passes. This would seem to effectively invalidate all start-up IP, since no one would be able to afford to defend themselves.

Like I said, I am not a lawyer, I do not know all the intricacies of this, but it certainly seems possible that HR9 could lead to small companies (aka companies that actually innovate) being punished and having their IP rendered defenseless.

It seems like HR9 is one of those things where strong emotion (against trolls) is being channeled in a direction that creates more problems than it solves.